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On the choice of in-house production versus outsourcing by multinationals

  • C. Alyson
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    The global economy is becoming more integrated with the increase in international fragmentation. This paper examines two forms of global production networks in a general equilibrium framework by building on the 'knowledge-capital model.' The focus is the relationship between country characteristics and the multinational firm's choice either to allocate the labor-intensive processing stage in-house to its foreign affiliates or to outsource the activity to outside contractors at arm's-length. Chinese data on the export processing trade are used to test the theory. The findings show that multinational firms with their headquarters in highly skilled-labor-abundant countries of intermediate size have a preference for outsourcing. By contrast, skilled-labor-abundant countries of small size are homes to multinational firms with subsidiary production in the host country where unskilled labor is cheap.

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    File URL: http://www.tandfonline.com/doi/abs/10.1080/09638190600691000
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    Article provided by Taylor & Francis Journals in its journal The Journal of International Trade & Economic Development.

    Volume (Year): 15 (2006)
    Issue (Month): 2 ()
    Pages: 231-254

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    Handle: RePEc:taf:jitecd:v:15:y:2006:i:2:p:231-254
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    1. Barbara Dluhosch & Michael Burda, 2000. "Cost Competition, Fragmentation and Globalization," CESifo Working Paper Series 393, CESifo Group Munich.
    2. Kevin H. Zhang & James R. Markusen, 1997. "Vertical Multinationals and Host-Country Characteristics," NBER Working Papers 6203, National Bureau of Economic Research, Inc.
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    4. Gene M. Grossman & Elhanan Helpman, 2003. "Outsourcing Versus FDI in Industry Equilibrium," Journal of the European Economic Association, MIT Press, vol. 1(2-3), pages 317-327, 04/05.
    5. Markusen, James R & Maskus, Keith E, 2002. "Discriminating among Alternative Theories of the Multinational Enterprise," Review of International Economics, Wiley Blackwell, vol. 10(4), pages 694-707, November.
    6. Sylvie Démurger & Jeffrey D. Sachs & Wing Thye Woo & Shuming Bao & Gene Chang & Andrew Mellinger, 2002. "Geography, Economic Policy, and Regional Development in China," Asian Economic Papers, MIT Press, vol. 1(1), pages 146-197.
    7. Venables, Anthony J., 1999. "Fragmentation and multinational production," European Economic Review, Elsevier, vol. 43(4-6), pages 935-945, April.
    8. James R. Markusen, 2004. "Multinational Firms and the Theory of International Trade," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262633078, June.
    9. Robert J. Barro & Jong-Wha Lee, 2000. "International Data on Educational Attainment: Updates and Implications," CID Working Papers 42, Center for International Development at Harvard University.
    10. Robert C. Feenstra, . "Integration Of Trade And Disintegration Of Production In The Global Economy," Department of Economics 98-06, California Davis - Department of Economics.
    11. Hummels, David & Ishii, Jun & Yi, Kei-Mu, 2001. "The nature and growth of vertical specialization in world trade," Journal of International Economics, Elsevier, vol. 54(1), pages 75-96, June.
    12. Jose Campa & Linda S. Goldberg, 1997. "The evolving external orientation of manufacturing: a profile of four countries," Economic Policy Review, Federal Reserve Bank of New York, issue Jul, pages 53-81.
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